What Is The Difference Between Common Stock And Preferred Stock?
Besides common stock, there is another type of shares that is called preferred stock. The difference between common and preferred stock is that preferred stock has additional benefits. Maybe the most important one is that the dividends obtained by a company are distributed, first, among owners of preferred stock.
But, there is an additional plus. In case the company goes through a process of insolvency or bankruptcy, the first stockowners who are going to receive a payment for their shares are the ones who own preferred stock. Meanwhile, common stock owners have to wait until the end and hope that there is some money left for them (which, in the majority of cases, doesn’t happen). In this case, common stock prices won’t be enough to save the capital that has been invested by the shareholder.
The second big difference is that the dividends paid by preferred stock are much bigger than the ones paid by common stock. Preferred stock owners receive pre-defined payments, while common stock owners depend on the decision of the board of directors. As a consequence, preferred stock owners can use their shares as a fixed-income security.
There are many kinds of preferred stock. For example, there is the Convertible Preferred Stock. In this kind of stock, the stock owner has the option of converting his preferred stock into common stock at a determined price. Another type of preferred stock is the Perpetual Preferred Stock, where the owner of the stock hasn’t a set date for receiving their invested capital. The dividends on this type of preferred stock simply accumulate over each other until the board of directors makes a decision.